Outlook: America's virtuous circle is unbroken

WHEN EVERYBODY starts taking the soaraway American economy for granted, it will probably be time to start predicting a recession and a crash. But, yet again, the surprise was in the other direction yesterday. Virtually everyone was predicting growth would halve in the first quarter. In the event there was only a modest slowdown. The US economy is still expanding at a stonking pace.

Not surprisingly, there was some pick-up in the GDP deflator. This very broad measure of prices showed inflation rising - but from a negligible 0.8 per cent at the end of last year to a lowish 1.4 per cent in January- March. About half the rise, moreover, was down to higher oil prices. There is still no sign of the economy hitting the obvious bottleneck of a shortage of workers. Even with just 4.2 per cent unemployment, there seem to be no wage pressures.

It is only human nature, especially for those of us not in the US, to think this is too good to be true. One obvious fault line is the widening balance of payments deficit. As long as foreigners want to keep buying US assets, this doesn't present too much of a problem. In 1987 foreign confidence in the US evaporated suddenly, and a particularly bad trade figure was the trigger for the October stock market crash. In theory this could happen again, but it is worth remembering that as a share of GDP, the deficit is not yet at record levels.

The vulnerability of Wall Street is the second potential weakness. But, again, it is hard to see what - apart from rising inflation - could topple share prices. There are certainly bubble-like characteristics in the technology sector, but if the effect is to pump funds into promising new areas of the economy, who's worrying? This is exactly what stock markets are supposed to do.

Let's suppose the worst - that the S&P does crash by 25 per cent, its average fall with the onset of recession in the post-war era. How catastrophic would that be? There is plenty of scope for stimulating the economy in the event of disaster; real short-term interest rates are no lower than average, and the government has a budget surplus.

There is simply no break yet in America's virtuous economic circle.